Mortgage Securitization and “The Crisis”
January 18, 2010 Regulation

This paper quantifies the scale and scope of the commercial real estate mortgage bond market … in an attempt to better understand the role of retail mortgage debt. In particular, this paper quantifies the size of the market, identifies risk factors affecting the coupon yield spread over Treasuries and utilizes a unique data set to construct a commercial mortgage price index …

A substantial retail appetite for real estate securities during this period may have significantly contributed to a real construction boom, but overly optimistic speculation in these securities may have led to overbuilding. The rapid deterioration of these securities and a near complete drop in issuance show, ex post, that investors were overconfident in building fundamentals during the boom years. The breakdown in the value of real estate securities as collateral assets preceded the crash … and may have contributed to the fall of asset prices more generally.

This paper is, of course, talking about the 1920s. But regulators thought nothing of the securitization of the last 20 years … does 80 years of experience not constitute enough time for regulators to learn something?

"1" Comment
  1. I tried to follow your link, but since I am not a developing country could not go further.

    Your point that we have not learned from history is well-taken.

    Our recent past and current situation was caused to a great extent by our government giving favorable terms to mortgagers, and by implying to brokers (bankers) that those mortgages would be backed by the federal government. Thus trillions of dollars of contracts were written and sold on those terms.

    The 20’s and ’30’s were different, though. There was no real-estate bond market then. Farmers had loans on their property, and deflation caused them to default. Banks failed, as did other creditors, with people unable to pay. This was not the fault of under-regulation, but the failure of our government to keep the value of our currency stable. Amid all this, Hoover raised taxes and with congress approved tariffs.

    Are these people trying to say we had sliced-and-diced implictly guaranteed CDO’s, or anything like them? I know we had gold bonds, and first-mortgage bonds, and equipment trust certificates, and we had farmers taking out loans from the bank to buy the farm.

    How would these people argue that they would improve on these contracts, and how would the be able to make the right decision?

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